Italy bond yields jump as investors brace for budget clash

Italian government debt was under selling pressure Monday, pushing the yield on 10-year paper to its highest intraday level since May, after European Union officials criticized the governmentâs fiscal plans, reinforcing expectations for a budget clash with Brussels.

Investors are also weighing the prospect of near-term downgrades to Italyâs credit rating.

With Italyâs key government figures ââover the weekend making it clear that they are in no mood to compromise with the Commission over their reckless fiscal plans, BTPs are again underperforming,ââ said Chris Scicluna, economist at Daiwa, in a note.

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A sharp rise in Italian government bond yields tied to budget worries and the rise in U.S. Treasury yields dominated fixed-income trading last week. U.S. trading in Treasurys is closed Monday for the Columbus Day holiday. Equity markets are open.

See: Why Monday may offer a respite for stock-market investors after a bruising bond rout

The yield on the 10-year Italian government bond TMBMKIT-10Y, +5.48% rose 17.3 basis points, according to FactSet, to 3.581% after trading as high as 3.628%. Yields and bond prices move in opposite directions.

The yield premium demanded by investors to hold Italian bonds over the 10-year German bund TMBMKDE-10Y, -5.70% widened by 25 basis points to nearly 3.11 percentage points, the widest spread since May 29.

Italy last week unveiled a target for its 2019 budget deficit of 2.4% of gross domestic product, three times as large as the previous governmentâs target. The all-important spreads between Italian and German bond yields widened temporarily beyond 3 percentage points then came back in after longer-term projections showed the deficit target falling in 2020 and 2021, though economists argued that accompanying economic projections were overly optimistic.

In a letter Friday to Economy Minister Giovanni Tria, the European Commission said Italyâs budget targets are a âsource of serious concern,â news reports said.

Italyâs government over the weekend said it wouldnât retreat from its budget plans, news reports said. The prospect of a clash has triggered a selloff in Italian bonds and stirred fears of credit downgrades.

Italyâs de puty prime minister, Matteo Salvini, who heads the far-right League party, on Monday said he hopes credit-ratings firms show no prejudice toward Italy when they review their ratings, Reuters reported, while also reiterating that Rome wouldnât exit the euro.

The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, +1.37% rose 17.1 basis points last week, its sharpest weekly advance since February, taking it toward 3.23%, its highest level since 2011 and unsettling equity investors.